POST CORONA

Kenya tipped on reopening economy among Sub-Sahara states

According to the report, Small enterprises need to be convinced of the broader benefits of formalisation, notably access to finance, markets, and labour

In Summary
  • Governments can encourage more small businesses to enter the formal economy by generating market access schemes for MSMEs, Mckinsey & Company says.
  • Private sector should proactively engage with government especially in the context of potentially severe economic recession.
Hawkers in Kibirigwi, Kirinyaga county, sell their goods from stalls on Tuesday after the government banned hawking of goods to motorists and passengers on the road
HAWKING BAN: Hawkers in Kibirigwi, Kirinyaga county, sell their goods from stalls on Tuesday after the government banned hawking of goods to motorists and passengers on the road
Image: /EUTYCAS MUCHIRI

Kenya, among other Sub-Saharan economies, need to develop stronger supply chains locally and regionally to become more competitive, think-tank Mckinsey & Company has advised.

In a report dubbed 'Reopening and reimagining Africa: How the COVID-19 crisis can catalyse change', the firm has called on both government and private sectors to play lead roles in supporting small businesses, manufacturing and agriculture sector(through agro-processing), to help in the post-Covid-19 recovery.

Governments can encourage more small businesses to enter the formal economy by generating market access schemes for MSMEs, the firm says.

For example, the state can strengthen government-guaranteed offtake schemes and incentivize large companies to integrate MSMEs into their supply chains.

“Governments’ support to businesses during the crisis might translate into more active industrial policy and intervention in years to come,” Mckinsey notes.

Small enterprises need to be convinced of the broader benefits of formalization, notably access to finance, markets, and labor, the report says.

“Building on the drive to formalize MSMEs during the crisis, governments can design compelling packages, potentially including access to favorable borrowing terms, multi-year tax holidays, and capability building.”

The country is among those that have come up with measures to support businesses among them a Sh3 billion SME credit guarantee scheme recently announced by President Uhuru Kenyatta as part of his economic stimulus package to resuscitate the economy.

Last week, Central Bank of Kenya governor Patrick Njoroge said at least 75 of small and medium businesses risks closure by end of June due to lack of funds as coronavirus bites.

This translates to close to eight businesses out of every 10, a situation the CBK governor describes as dire and required quick interventions for a sector that accounts for 70 percent of new jobs in the country.

''Those businesses are on rocks and would be in a critical state by the end of June. They are in need of urgent rescue plan,’’ Njoroge said.

For the manufacturing sector, the impact is estimated based on two forces: disrupted commercial activity (reduced demand) and supply disruption (resulting in the inability to produce).

Mckinsey in its report has urged companies to embrace a number of approaches to emerge from the crisis in a stronger competitive position.

This includes ramping up operating efficiency where companies need to look for ways to reduce cost and improve productivity—both during the downturn and in the recovery.

During the 2008–9 financial crisis, resilience reduced their operating costs by more than three times their non-resilient peers, for example by digitizing their processes and embarking on lean transformations.

The other measure is to innovate business models where companies may need to pivot their product, target-customer, channel, or pricing strategies to adapt to changing market conditions.

Companies should also move boldly on divestitures and acquisitions.

In past crises, resilience has been faster than other firms to divest themselves of assets that were no longer core to their businesses and bolder in acquiring firms that would help them build new capabilities or expand their footprints in key markets.

“This is the time for African companies to adopt a similarly aggressive posture on divestitures, mergers,” the firm says.

Meanwhile, the private sector can proactively engage with government especially in the context of potentially severe economic recession.

This will help address challenges in different sectors of the economy, experts say.

“Business leaders need to understand the potential implications decisions on their enterprises and sectors, and could offer their support and expertise to the government to ensure that interventions and programs are well designed and executed,” the report reads in part.

The government is said to be contemplating adjusting curfew hours to between 9 pm and 5 am and relax inter-county movement. The aviation business is also expected to resume by next week.

While restrictions such as lockdowns and curfews have helped slow the spread of the virus in many countries, they have also created acute economic hardship for a large proportion of the urban poor—most of whose work requires free movement,Mckinsey & Company notes.